To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

09/20/2010

“Not yet” but may be not-too-far

Days before Indian commerce minister Anand Sharma flies in to Chicago to discuss thorny issues of visa fee hikes and an outsourcing ban, rating agency Moody’s Investors Service has downplayed fears. It said such “protectionist sentiment” were “not yet a threat” for the Indian outsourcer.

US’ efforts to spruce up protection along its porous border with Mexico have ruffled more than a few feathers half way across the globe, amongst the heavy weights of the Indian Information Technology (IT) sector. On August 10, the U.S House of Representatives approved pulling up security along its southwest border by enhancing fencing, infrastructure, law enforcement and deployment of unmanned aircraft systems.

The big question: who picks the tab?

According to the industry lobby Nasscom, Indian IT firms could be forking out $250 million to make US' borders safer – by paying roughly $2000 more for each H1B and L-1 visa. This will fund about 40% of the overall $600 million provisioned.

Moody’s September 16 report said that while the “recent protectionist sentiment in the U.S. has potentially negative credit implications for Tata Consultancy Services (TCS) and…other major outsourcing firms” such as Wipro and Infosys, it was “not to the extent of threatening TCS’s rating or outlook”.

Analysts Ken Chan, Gary Lau and Philipp Lotter, authors of the Moody’s note, are drawing this comfort from two arguments: TCS’ annual revenues last year touched $6.3 billion, implying “the added costs will not have a material impact on the firm’s profitability or rating”.

Secondly, even if the Ohio sentiment spreads to other US states, the note explains, “the share of such governmental revenue for Indian outsourcers remains negligible” compared to huge sums paid out by the private banking and financial sector. The risk rating agency views much of this as election rhetoric which will not dent the long-term growth in outsourcing to low-cost countries.

This doesn’t fly. Not for long at least. Certainly not by looking at it as a miniscule peck in the overall revenue pie right now. That will be a myopic view because these barriers, once placed, can be scaled up easily.

It is true that India earned nearly $50 billion in exports in 2009-2010 and over half of it from US. This tax of $250 million will then constitute about one-hundredth of its revenues just from US. But that's just math.

The larger question is how far will the Indian government and its IT companies fight to keep these allegedly discriminatory walls down? For once erected, it takes very little to raise them a bit every now and then. And that’s when the shoe may begin to pinch, even if it doesn’t now.